TMFDeej (99.32)

Now is the time to buy natural gas

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I was thinking about commodities this morning and I decided that now is the time to buy natural gas. Here is how I came to this conclusion.

Natural gas has been an absolute mess over the past year. The price of nat gas has absolutely collapsed from over $13 last summer to less than $4.00 today. After a recent head fake to slightly over $4.00 natural gas closed yesterday at $3.64.

There are several reasons why the price of natural gas fell so precipitously, including the strengthening of the U.S. dollar, but the main reason is that the number of rigs drilling for it skyrocketed when prices were high and the current recession caused industrial usage of nat gas to fall. Economics 101 dictates that high supply of and low demand for a commodity creates low prices. The supply of natural gas is still sits at the top of its five year average range:

This chart may lead one to ask "If the amount of gas in storage is so high, then why are you so bullish on it?" The answer is help is on the way in the form of fewer rigs actively drilling for gas. The time to buy nat gas and E&P companies that have significant exposure to it is when prices are low.

This collapse in the price gas has been absolutely disastrous for drillers. According to Baker Hughes, after peaking at 1,600 in September of 2008 the number of active natural gas rigs in the United States is now only to 782, down over 50% versus the same period a year ago. The number of rigs drilling for nat gas in the U.S. is now sitting at a six and a half year low (see article: US natural gas rig count down to near 6-1/2 yr low)

Now I'm not a big believer in all of these green shoots that everyone keeps talking about, but even if the economy doesn't recover significantly by the end of the year like many expect, the pace of decline in this recession, and in turn the drop in industrial demand for natural gas will likely slow going forward. According to the Energy Information Administration (IEA), total U.S. natural gas consumption is expected to drop by 1.9% in 2009 and then increase slightly in 2010. That is the sort of stabilization that I am talking about.

Natural gas is a relatively clean power source. Now I'm not one of those fools who believes that the mass adoption of natural gas vehicles, like our friend T. Boone Pickens was pushing for, is likely. However, with the current Administration pushing for CAP and Trade legislation or some sort of reduction of carbon emissions electricity generation from nat gas will likely increase over the next several years. Furthermore, lower relative natural gas prices compared with coal, particularly in the Southeastern United States, will likely encourage the use of it for electricity generation capacity in the near-term.

It could take a while for natural gas prices to recover. It is very possible that we will not see a significant increase in its price until the cool fall weather arrives...unless some sort of major storm hits the natural gas producing section of the Gulf of Mexico this summer, which is always a possibility. The main catalyst for an increase in the price of gas towards the end of the year is the significant is count reduction that I mentioned earlier. The EIA estimates that nat gas will average $4.06 in 2009 and $5.21 in 2010. I am even more bullish on the price of nat gas than that.

Hi SideShow. I personally would definitely go with natural gas instead of oil at this time. Oil has already made a huge run, up something like 75% from March and more than double its recent low. That move is in the fact of terrible fundamentals, like an extremely high supply and falling demand. A lot of it is hedge funds bidding the price of oil up.

On the other hand, these hedge funds are net short natural gas, pushing its price down. Natural gas is still sitting at a very low level. I realize that unlike oil we have an ton of nat gas here in the United States. Peak oil believers (and the theory makes a lot of sense) would claim that the case for oil is more bullish long-term and I tend to agree, but in the near future aka the next 12 months I personally expect the price of nat gas to increase by a larger percentage than the price of oil.

Sorry Cato ;). You don't have to play natural gas directly to benefit if its price increases. I'm not in real life. Instead I have a couple of positions in E&P companies (I like them better than drillers) that have significant nat gas assets. Many of these companies pay solid dividends that are easily covered by their current cash flows which will pay you to wait for an increase in commodities prices. Furthermore, many of them have exposure to oil as well, which spreads out the risk some.

Personally I prefer the MLP plays in nat gas, like LINE or EVEP. Great yields and they always hedge themselves. Biggest problem with nat gas is oil and coal are much easier for delivery. Also re-starting those rigs can again cause over production down the road.

Deej, why are you looking at an ETF instead of individual companies that specialize in natural gas, or natural gas/oil companies? Great write-up, I've been looking to add some nat. gas/oil energy plays to my portfolio, and this helps. Thanks.

Great write-up. I am considering UNG myself for many of the same reasons. For those who are asking about which individual companies to pick: the UNG ETF allows you to take advantage of the nat gas prices going up without having to do any research on individual companies. If you have the time to do DD, go ahead and find those companies (and let us know here on CAPS).

One statement is not correct:

"However, with the current Administration pushing for CAP and Trade legislation or some sort of reduction of carbon emissions electricity generation from nat gas will likely increase over the next several years."

Nat gas is definitely a clean energy source, but when you burn it you end up with water and carbondioxide. Changing from coal to nat gas will clean up the air significantly, but will not reduce carbon emissions.

Thanks for reading everyone. The reason why I used UNG as the ticker symbol for this article is because that is what it is about. I rarely make pure plays like UNG in CAPS, but I feel strongly enough about this trade to do so.

I already am long some of the great MLPs etc that produce nat gas that many of you mentioned in CAPS.

I will not purchase UNG in real life, but a very strong case can be made for doing so. I already own decent natural gas exposure through a CANROY and CHK preferred stock.

Nat. gas makes lots of sense. It works for fleet vehicles, burns clean, is plentiful, etc. It is also possible to make liquid fuels from it if we are really close to peak oil.

Wind and solar currently make up less than 1% of electric capacity. If we really do expand that greatly, gas turbines about the only thing you can fire up quickly to take up the slack if wind not blowing or sun not shining. Solar is too expensive right now and wind is only competitive in some locals- but that is an argument for another place.

I hold XTO for the long term. Conservative management-large gas exposure, and they hedge most of their production. The share price is still well below last year's level. It also has a dividend.

At the end of 2008, worldwide wind farm capacity was 120,791 megawatts (MW), representing an increase of 28.8 percent during the year, and wind power produced some 1.3% of global electricity consumption. Wind power accounts for approximately 19% of electricity use in Denmark, 9% in Spain and Portugal, and 6% in Germany and the Republic of Ireland. The United States is an important growth area and installed U.S. wind power capacity reached 25,170 MW at the end of 2008.

Portefeuille, Just curious, but how does total capacity of wind and solar production compare between the US and say Denmark, Spain, etc. Does the US actually have higher capacity but the percentages are low because total demand within the US is so much higher? I also always wonder how quickly an opposition group to wind/solar will gain traction. It essentially killed nuclear in the US, and I've heard reports of it stalling wind porjects off the coast of the US.

I would love to see wind and solar really make a move, but I feel like we always hear "it is 10 years away from commercial capacity". I've been hearing that for 20 years at least. Seams like they mean they are waiting on some final breakthrough to make it cheaper and cost effective, but the breakthrough never comes.

Global renewable electricity generation is set to rise by an average of 2.9 percent per year from 2006 to 2030, increasing from 19 percent of supply in 2006 to 21 percent by 2030, the Energy Information Administration said in its annual international energy outlook.

I added UNG in my CAPS portfolio and bought some in real life the other day. I'm not a TA, but just from looking at the first chart that you showed that something fundamentally is changing in it's TA picture... It broke through it's 50-day MA for the first time in almost a year a couple of weeks ago.

Also today it's been up like 9-10%. Does anyone know why it's spiking up today???

Port, That doesn't answer the question. I'm curious about production capacity, not as a percentage of the total. For example if the US total electric capacity was 1000 watts and 100 watts came from solar/wind that would be 10% for total us supply.

Lets say Denmark got 20 percent from solar/wind but their total capacity as only 100 watts. That would put them at 20 watts from solar/wind. The US would have a much greater capacity for solar/wind, but as a percentage of total electrical output it would still be a non-significant amount.

I'm just curious if that is the case or if the US is behind not only as a percentage of total but in absolute value. Your source doesn't seem to address that, though I have yet to read the whole link.

I used to think Peak Oil was a theory also but it is not really a theory. All Peak Oil describes is how a oil field or group of oil fields deplete. They have a lot of data on oil field depletion rates and just about all oil fields follow the same basic curve.

What most people debate when it comes to peak oil is whether we are actually at world peak oil production already or not.

I think US Oil discoveries peaked in the 1930's. This is a fact. It can not be disputed. Every year up until the 1930's the US found more and more oil within the US at ever increasing rates. After 1930's oil was found every year at ever decreasing amounts. If you plot how much oil was found year by year then you would graphically see that Oil discoveries in the USA "Peaked" in the 1930's.

Now, if you plot the same graph for US Oil production then you will find the Total US production of oil "peaked" sometime in the early 70's which is approximately 40 years after US discoveries peaked.

Where the debate on Peak Oil comes in is the Total Worldwide Discoveries "peaked" in 1964. So, here is where the theory comes in....There are some that theorize that because it took the USA 40 years to go from Peak Oil discoveries to Peak Oil production that if you add 40 years to 1964(which is worldwide Peak Discoveries), well that would have predicted that peak oil had arrived in 2004.

"Experts" are not so much debating that peak oil exists but the debate rages over we are currently at peak oil or not. This is mostly a academic argument.

What really matters is if worldwide oil demand rises above total worldwide supply before the world as a whole is able to transition to alternative fuels. If that particular scenario happens then oil prices as well as other commodity prices will go through the roof.

I forget how much energy goes into bringing things like food to the market but the US uses a tremendous amount of energy in food production. If we get energy shortages we would also get food shortages and probably chaos.

There would be tremendus disruption to our society. That is why I am investing selectively in various alternative energy and/or conservation stocks.

This is probably why Buffett also invested in BYD. BYD is not just going to make batteries for cars but they plan to make batteries for power distribution too....You know these batteries will work well for solar when the sun is not shining.....works good for wind mills when the wind is not blowing.

Buffett.....always one step ahead. That is the type of investing I want to do...One step ahead of people figuring things out.

I've done extensive research on the use of windmills for commercial and residential use and think this is a fast emerging energy source that is going to be used more especially with the 30% income tax refunds and the federal laws where energy companys are required to buy surplus killowatts. Anyone have a suggestion of a company that looks good to invest in for windmills? mstoolly

Good points. Just wanted to add one more comment worth noting on the subject. Average decline rate on nat gas well: 30%. Can be even worse in some of the shale plays mostly responsible for increasing our supply so much recently. If you combine substantial drop in drilling with 30%+ decline rates....when the trough is reached, it could rebound quickly.

I would like to that Deej for this thread. Without it I would not have spent so many hours researching cng plays. I normally stay away from the energy sector because it is so politically charged. The conclusion I reached is that MXC would be a good play for real money. It is a micro-cap, unfollowed, little debt, good inside ownership and is heavy with cng. I recommend you do the research on it, read the annual report. If you are a small cap nut, like me, I think you will like this one as well.

BWP has meandered around 20, but if nat gas takes off, watch this MLP roar! It pays out a nice dividend right now at 9.63%.

isn't true. BWP is paid on volume, not price--so an increase in nat gas prices does not significantly help BWP. However, unlike people who directly are affected by nat gas price swings, BWP is not bankrupt like, say, APL.